The global manufacturing industry is currently experiencing one of the most significant parts supply crises in years: a shortage of semiconductors or “chips.” These critical components are responsible for the functionality of all modern electronics, which in today’s world means nearly every product more complicated than a ballpoint pen. Producers in the automotive and consumer electronics industries have been struggling to keep up with demand.
Trends in Semiconductors: Supply and Demand
The current shortage is a result of several contributing factors. To begin with, semiconductor manufacturing is a complex, expensive business with few suppliers, uniquely vulnerable to even relatively small disruptions to supply chains—and COVID-19 was no small disruption. Couple that with major events such as the earthquake that damaged a chip manufacturing plant in Fukushima, Japan in March 2022, and the complexities of the trade war with China, the supply of chips has become increasingly unreliable.
Demand has also played a major role in creating the shortage. Automakers have increasingly incorporated innovative electronics systems into their vehicles—systems that require chips. Between infotainment systems, safety features, and automated systems, a modern car can contain up to a thousand individual chips. The rise of the internet of things has caused a similar increase in demand for chips in connected devices—the difference between an old-fashioned vacuum cleaner and a Roomba is largely about chips. And with consumer spending still high despite the Federal Reserve’s best efforts, persistent demand for smart devices has further driven up the prices of semiconductors, affecting the entire manufacturing industry.
For manufacturing leaders, this moment is a challenge—but it’s also a chance to create more resilient and sustainable semiconductor supply chains. To get through this difficult moment, and to make sure you’re prepared for the next shortage, here are a few steps you can take today:
Identify your supply chain vulnerabilities
Go step-by-step through your supply chain and identify where you’ve seen issues in the past, or where you may see issues in the future. A supplier who has shipped orders late or had to cancel orders may still be worth keeping your relationship with, but you’ll still want to monitor and mitigate the risk. Alternatively, a product with hard-to-predict demand will also be worth extra scrutiny.
Once you’ve identified the vulnerabilities, think about which could cause the biggest problems if things went wrong.
- Which of your suppliers are providing the most complex chips?
- Which would be most difficult to replace in your products if necessary?
List your vulnerabilities and quantify the risk you face from each one—and then use the likelihood and the seriousness of each vulnerability together to decide which you should address first.
Break down the silos with your team and align on process
Once you know what vulnerabilities you’re addressing, you can bring your teams together around a plan. We recommend setting this as a piece of your standing S&OP agenda. You’ve already got sales, operations, and procurement all in one place, so tasking them to think about how to address supply chain concerns in this process will give you better solutions which connect to the necessary parts of your business.
In many cases, you may be able to control major vulnerabilities with the resources you have in place today. However, if the vulnerability cannot be controlled immediately, start by exploring process enhancements as a fix. It’s possible you’re too dependent on one supplier for a specific type of chip. Are there other suppliers you can rely on for a comparable product? If not, can you flex your manufacturing processes to make shortages easier to handle? Or maybe it’s worth buffering your safety stock on the chip in question if a supply crunch could hurt you down the road.
Invest in connected planning
Technology can be a great lever to pull in creating a more resilient supply chain. Evaluate your tech stack and identify technologies you already have that can help fill the gap. If you’re using a connected planning solution like Anaplan, it’s likely you already can connect demand planning, supply planning, and supplier base into your S&OP process. Use your tools to their full functionality to make sure you’ve got visibility into your supply chains and make more comprehensive plans for shortages.
If you don’t already have a system like this in place, it’s a worthwhile investment. Between increased visibility between business units, the ability to make multiple connected what-if plans, and the collaborative approach to planning that a tool like this provides, you’ll be much better equipped to address a supply shortage or avert one before it happens.
Increase collaboration with your suppliers
At the end of the day, all business is personal, and that includes the business you do with your suppliers. Make sure you have multiple contacts at every chip manufacturer you depend on, and keep them close. In the worst-case scenario, your suppliers will have to decide what orders to fulfill—so make sure that you’re as close to the top of the list as possible.
Practically, this means having regular touchpoints with your suppliers. Not only will this help you maintain your relationships, it will also give you more transparency into the risks you face. Ask your suppliers about their own risk mitigation plans and share yours with them to make sure you’re aligned. Through this process, you’ll be able to better predict how reliable each part of your supply chain is and plan accordingly.
Supply chain solutions that work
Between economic uncertainty, potential labor shortages, process, and silo’ed decision making, is your organization confident in its supply of semiconductors? Spaulding Ridge has implemented supply chain solutions for manufacturers in a wide range of industries, and we can help you secure your supply lines before they snap. Let’s chat about how you can protect your business and keep products moving.